Monday, August 30, 2010

GT Solar International, Inc. (Nasdaq: SOLR) is a provider of polysilicon production technology, and sapphire and silicon crystalline growth systems and materials for the solar, LED and other specialty markets. The Company’s principal products are:

*Chemical vapor deposition (CVD) reactors and related equipment used to produce polysilicon, the key raw material used in silicon-based solar wafers and cells; and

*Directional solidification systems (DSS) furnaces and related equipment used to cast multicrystalline ingots by melting and cooling polisilicon in a precisely controlled process. These ingots are used to make photovoltaic (PV) wafers which are, in turn, used to make solar cells.

GT Solar recently acquired the privately-held Crystal Systems, Inc. Crystal Systems is a crystalline growth technology company that manufactures large area sapphire substrates used in the LED, defense, medical and aerospace industries.

GT Solar’s 1Q11 ended July 3, 2010. Revenue for this quarter totaled $135.2 million, compared to $194.7 million in 4Q10, a 30.5% sequential decline and $71.8 million in 1Q10, an 88.3% increase. Revenue for the first quarter included $23.7 million in the polysilicon segment and $111.5 million in the photovoltaic (PV) segment. In the twelve month period ending July 2010, sales rose to $607.6 million from the FY10 total of $544.2 million, an 11.6% change. The consensus estimate of nine analysts following SOLR is for FY11 revenues to come in at $735.32 million. Estimates range from $596.3 million to $782.7 million.

The Company had net income of $16.5 million in 1Q11, as compared to $33.3 million in 4Q10 and $7.8 million in 1Q10. Earnings per share in 1Q11 on a fully diluted basis were $0.11, versus $0.23 in 4Q10 and $0.05 in 1Q10. The consensus forecast for FY11 is $0.93. The estimates range from $0.85 to $0.97. Analysts are revising their estimates both up and down.

The balance sheet is strong with cash and short term investments totaling $276.5 million at the end of 1Q11. The Company reports no long term debt. Total liabilities are $545.5 million. GT Solar reports strong and growing free cash flow per share. As of 1Q11, GT Solar reported trailing twelve month FCF of $0.78/share as compared to $0.98/share in FY10 and $0.57 in FY09.

The Company is consistent in generating gross profits. Since FY06, the gross margin has ranged from 37.8% to 40.2% with an average of 39.11%. Operating margins have improved from a low of -44.0% in FY06 to 26.4% in FY10 and 25.6% for the twelve month period ending 7/10. Net margins have also changed from a low of -46.6% in FY06 to 16.0$ in FY10 and 15.8% in the trailing twelve months. The company does not pay a dividend.

Risk Factors

At first glance, GT Solar is an attractive investment for the long-term investor. They are engaged in what is perceived as a growth industry. The Company has a healthy balance sheet, a history of sales and earnings growth and generates free cash flow. Capex is not a major factor as the Company outsources most manufacturing activities. A look under the hood, however, reveals a number of significant risks.

At the macro level, the solar energy industry relies upon government subsidies to compete with hydrocarbon based sources of energy. Until this disparity in cost is rectified, solar energy will never be as widespread as many people think. Another macro issue is China. The majority of sales come from Chinese companies. Any slowdown in the Chinese economy, changes in exchange rates and political/military instability will have a damaging effect.

More importantly, we think, are the company specific risk factors. SOLR depends on a very small number of customers. In FY10, one customer accounted for 34% of revenue. In FY09, four customers represented 62% of sales and in FY08, one customer accounted for 62% of revenue. Clearly, the loss of one customer would have a devastating effect on the Company. Additionally, GT Solar has a very small product line. Sales of the CVD reactors, DSS furnaces and STC converters accounted for 91% of revenues in FY10.

All-in-all, GT Solar may be an attractive speculative investment. The operative word here is speculative.